Macit, Fatih2024-03-132024-03-1320100313-5926https://doi.org/10.1016/S0313-5926(10)50038-9https://hdl.handle.net/20.500.12662/4294This paper develops a New Keynesian (NK) model that incorporates standard search and matching structure with firing costs. I analyze how labor market institutions affect the macroeconomic dynamics, in particular, wage and inflation dynamics. I particularly look at two important labor market institutions namely unemployment benefits and firing costs. I find that in countries where unemployment benefits are higher and there are more strict employment protection legislations, inflation and wages become less volatile and more persistent. I also find that the level of these labor market institutions affect how wages and inflation respond to exogenous shocks, in particular, to productivity and monetary policy shocks. I first present some empirical evidence that shows a cross-country link between labor market institutions and wages and inflation. Then I build a dynamic stochastic general equilibrium model which provides theoretical support for this empirical evidence.eninfo:eu-repo/semantics/openAccessArticle10.1016/S0313-5926(10)50038-92-s2.0-835551728634103Q139340WOS:000213276100009Q1